There are actually lifeboats to rescue the economy after all.
In a note on Monday, Morgan Stanley’s Adam Parker wrote about concerns that the Federal Reserve would struggle to revive the economy during the next downturn.
Last week, HSBC’s Stephen King wrote that the world economy faces a ‘titanic problem,’ because there won’t be enough proverbial lifeboats to rescue the economy during the next recession.
But Parker wrote that with the recovery still intact, the same tools that boosted it will work next time:
Recently, there has been some growing concern that the next downturn, whenever it surfaces, will lack the potential to be ameliorated by the Fed. We have written previously that we don’t think unconventional policy will be the medicine during the next cycle. More likely, it will be some conventional policy (our view is this will be a long expansion and the Fed will be able to slowly raise rates) and some fiscal stimulus. Our guess is that there will be a sharp drop in equity markets before there is fiscal stimulus, but the potential positives from fiscal stimulus could be enormous. Tax reform, repatriation, immigration law, infrastructure bills, and more productive spending are among the various positive potential elements of a coordinated fiscal agenda, many of which could fuel a better US market.
But for right now, Parker isn’t too concerned anyway.
For now, we are still focused on this economic expansion, given we think it could last for several more years. The fact that the market has achieved a new high despite the tapering of asset purchases, a muted economy, and this much negativity speaks to how attractive equities are vs. bonds and the potential for US improvement.
King, in contrast, argued that it would be complicated to use the traditional ‘ammunition’ of monetary and fiscal policy to solve the next crisis.
“Yet, as with monetary policy, it’s difficult to argue there is a great deal of flexibility on fiscal policy — unless, that is, governments are willing and able to tolerate deficits and debt levels far higher than seen in the peacetime past,” King wrote last week.